No Way Out, Part 1

Wednesday, August 10, 2011
By Paul Martin


Financial Risk
“The time to take counsel of your fears is before you make an important battle decision. That’s the time to listen to every fear you can imagine! When you have collected all the facts and fears and made your decision, turn off all your fears and go ahead.”
~General George S. Patton, Jr.

From “Favorable” to Fear

Fear has returned with a vengeance to the financial markets once again. The media has elevated the threat levels and seems bewildered. Why the sudden change? Less than a month ago it looked like markets were ready to break out to new highs. What went wrong? Is it America’s debt problems—the risk of default? Two weeks ago it was all about the debt ceiling debate, and then fears turned toward Europe. Now it is the downgrade of US Treasury debt. America’s pristine AAA credit rating has been lost.

The answer is much broader than this. Sovereign debt issues have risen to the surface and that’s what makes the current environment dangerous. However, what is happening now goes beyond the market’s debt fears. Behind them is a growing recognition that the economy may be heading back into recession again and it appears the government is impotent to prevent it. QE1 brought us back from the abyss. The stimulus was supposed to supercharge the economy and bring down the unemployment rate. QE2 was sold as another “insurance policy” to pull the economy out of a soft patch.

The stimulus is winding down and QE2 ended in June. The markets seem to be asking: What do we have to show for all this effort? Unemployment is rising and economic growth remains anemic and is at risk of another recession.

The Rest…HERE

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